patrick.net

Randy,

LOL! Blame it on the game theory profs!

Hmmm, for some reason I feel no pity for the McDebtors.

Am I evil?

--Mister Ecks

Answer:

Yes you are eevul, but not necessarily for those given reasons.

LOL! Blame it on the game theory profs!

It's a bit tongue-in-cheek, but...there is something to be said for "educating" management to speaking the same implicit language based on the same shared theories and interpretations. For example, has there been any MBA student who hasn't studied at least one HBR case involving Murdoch, and how his successes have been to the detriment of the overall potential benefit for everyone in the media industry, including himself? That sends a very powerful message over time to managers and certainly has an impact on how they make strategic competitive decisions.

>> Like, if all the notes came due tomorrow, does that much money even exist?

My guess is NO, WE DO NOT HAVE THAT MUCH MONEY IN THE SYSTEM …

More than that amount of USD exists in the central bank of China, alone. Most likely more than enough are in circulation as petrodollars as well.

There are a lot of USDs flying around the globe.

so, by proxy, a mass default results in China owning a bunch of houses in Cali? In a nut shell, is that pretty close?

That's a pretty far-fetched proxy.

a) All the notes don't come due tomorrow. Nowhere even close. They can't be called. And even foreclosure doesn't so cleanly "transfer the ownership to China". The US exercises sovereignty over property rights and laws within its own borders, just like everywhere else.

b) Americans own over 60% of the equity in residential real-estate, excluding rental-income real-estate (owned by businesses).

c) Take that remaining 40% that is financed. A nuclear meltdown scenario would be maybe 20% of that defaulting. That gives China (if they theoretically owned ALL outstanding mortgage debt in the entire country) 8%.

d) I don't have the figures, but let's be generous and say China really owns 33% of all outstanding mortgage debt. That gives them 0.26% of the housing stock.

I'm not going to stay awake at night worrying that China will become our masters anytime soon. It is a fear that's popular to overblow, because the absolute numbers are big and scary. But, if I'm not mistaken, the UK still "owns" much more of the US than anyone else. And, the US still owns more of the world than everywhere else, by far.

Anyway, I'd be much more scared of petrodollars from oil exporting countries. Those are more free to use the EUR as a reserve than goods exporters like China, they cause massive inflation in the USD globally, and they are generally held by countries not so generous to the US.

Final figure should have been 2.6% (but I'm still not going to have nightmares).

The US is kind of like one giant Walmart to China. They need to tread really really carefully to get out from under this behemoth, or they're gonna get squished.

If US really gets itself into serious trouble, China will be way too concerned about its own problems to gloat too much over the US. It is in China's interest to pray that US/Japan/EU demand for cheap goods will suck up a good chunk of the surplus labor, give China breathing space to develop (or steal) its own R&D and service based economy.

It's one hell of a tightrope. I really admire the post 1978 leadership for doing so well, considering the enormity of their task.

It’s one hell of a tightrope. I really admire the post 1978 leadership for doing so well, considering the enormity of their task.

China had access to excellent astrological and divination systems. Once the cultural revolution was over, decision-making became easy again. :)

SFWoman,

The problem isn't Chinese production. The Chinese are capable of assembling pretty great stuff. Plenty of designers (including European fashion houses) make their stuff in China, especially stuff intended for the Asian market. Almost all our portable electronics are now assembled there - some good, some great, some bad - it depends a lot on the specs of the American designers and their QC.

The problem is that Walmart chose to sell cheaply made goods. They sell this stuff to stupid people fooled by the low prices and doesn't realize how crappy the stuff is and that they'll break within the week.

Falling off and passing the 52nd floor of the twin 54 story condo towers under construction in Sacramento and as you drop past all you can say is;”So far, so good?”

:lol:

SFWoman,

It's okay. I can occasionally sound like Fox News (shudder) and I'm a self proclaimed progressive-socialist-believer in social welfare state!

Believe it or not, a good chunk of the Chinese are not happy about turning swaths of the Chinese countryside in sweatshops. The long term cost of pollution and sweatshop conditions outweighs the short term burst of productivity and revenue (much of profit gets channeled to corrupt local officials as kickback). New York Times occasionally reports these problems from rural China - those are just the very tip of the iceberg, the problem is huge and the common people are not happy about it.

There's not much you can do about the lack of respect to intellectual property. Even India, with its history of Common Law, still have trouble respecting intellectual property. In China, the concept of intellectual property is still very alien and taking a free ride on other people's intellectual property is irresistable. They're like teenagers with late 90's Napster - they don't think it's wrong, they really like it, they can't really afford that much otherwise and they can only be reined in by fear of getting caught.

SFWoman,

(Oops, the last one got caught on Sism again)

It’s okay. I can occasionally sound like Fox News (shudder) and I’m a self proclaimed progressive-soci ali st-believer in social welfare state!

Believe it or not, a good chunk of the Chinese are not happy about turning swaths of the Chinese countryside in sweatshops. The long term cost of pollution and sweatshop conditions outweighs the short term burst of productivity and revenue (much of profit gets channeled to corrupt local officials as kickback). New York Times occasionally reports these problems from rural China - those are just the very tip of the iceberg, the problem is huge and the common people are not happy about it.

There’s not much you can do about the lack of respect to intellectual property. Even India, with its history of Common Law, still have trouble respecting intellectual property. In China, the concept of intellectual property is still very alien and taking a free ride on other people’s intellectual property is irresistable. They’re like teenagers with late 90’s Napster - they don’t think it’s wrong, they really like it, they can’t really afford that much otherwise and they can only be reined in by fear of getting caught.

My boyfriend accused me of having both cat and sheep in my family tree, but I've yet to develop a taste for clover flavored catfood.

SFWoman,

Your view of Chinese manufacturing competition has quite a bit of truth to it. But, as others have pointed out, the issues are pretty complex; especially vis-a-vis Walmart's sourcing strategy.

The real "absolute advantage" that China has (they have no competitive advantage to the US; in fact a huge disadvantage) is easily explained by their currency peg. Even the legal differences, environmental regs, workers' rights, etc. wouldn't be so relevant if the RMB floated against the USD. What China is doing, instead, is taking inflation out of the US economy, hiding it internally amongst their GDP growth, and creating an unfair trade landscape.

But, it's actually a better deal for us than them in the long run. I realize displaced workers won't agree. But, those workers have been displaced because US industry has been unable to compete even given our competitive advantage. So, while China eats dollars and uses this game to advance growth on an unsustainable export-led expansion, we use their cheap products and inflation escape valve to restructure our economy and consolidate our industries to become more productive and more even more competitive. When the music stops, some day, they will be no match for US, hyper automated, industry. Meanwhile, we get a free boost to our standard of living because they're so willing to sit on top of green pictures of dead presidents.

SFWoman,

The US has increased its share of total global mfg output over the past 10 years. Meanwhile, Japan and Germany have both lost global share. The US produces an order of magnitude more global mfg. value than China, though China is growing the fastest. Even at their rate, it would take 40 years for them to equal US share, assuming we don't continue to grow also.

It is a myth that "nothing is made here anymore". What has happened, is that we've lost mfg jobs and agriculture jobs. But somehow, our output has increased, as has the value of that output. If that isn't due to automation then it's the mystic ether.

To be fair, what the anti-globalists always quote is either in units or tonnage, both of which the US has lost dramatically (in mfg, not agriculture). But, that's primarily due to Korean hyperscale steel industries (tonnage) and Chinese cheap-plastic-thingies (units). Neither of those are terribly high in output value. In fact, even in materials mfg, the US has experienced a renaissance in custom micro-plant fab, most of which are almost entirely automated and unrivaled in most of the rest of the world.

I'm no fan of Walmart or low-quality Chinese dohickies. But I'm not ideological, and I don't buy the protectionists' arguments that the US is going down the drain either.

ajh,

With respect, that sounds like a RealtWhore explaining why prices can never fall.

With appropriate respect, at least I made a reasoned argument instead of indirectly just calling names with nonsensical analogies. I enjoy disagreement, but calling me a "realtwhore" because I disagree with whatever it is you believe (which I cannot divine from the above), isn't very convincing.

Early indications before the actual CAR/DQ reports come out. If you are interested click on the report and go to the next page. It has an interesting table. The damage is widespread.

From http://rereport.com/scc/csper/index.html

Home Sales Rise in August as Prices Dip
Trends at a Glance
(Single-family Homes)
....................................Aug 06.......Jul 06..............Aug 05
Median Price:................$770,000....$805,000........$760,000
Average Price:..............$944,004....$977,524........$924,431
Home Sales:.................1,080.........973................1,404
Inventory:....................3,889.........4,023.............2,816
Sale/List Price Ratio:......99.4%.......99.6%............100.3%
Days on Market:............42.............40..................29
Days of Inventory..........108...........124.................60

The median price for single-family re-sale homes in Santa Clara County fell 4.3% in August from the month before. Year-over-year, the median price was up 1.3%. The average price fell 3.4% from the month before, but was up 3.4% compared to August 2005.

SMS quote of the day:

"2 b or not 2 b that is the ? wthr ts noblr in the mnd 2 suffr the slings n ↔ of outrgs $$ or 2 take rms agnst a c of troubles n by opposing end them?"

maybe Peter P is the mutated ship's cat off Red Dwarf? or near relative...

speaking of prosperity doctrines, sydney was blessed by a visit from tony robbins recently. he, at least, walks away with $300-400K per day for each of his circus performances... truly 'a tale told by an idiot, full of sound and fury, signifying nothing...' - Enter the YES man

DS! Where have you been? Nice to have you back...

oh, been in and out... time zones, you know how it is...

Bap33 poses a legitimate question. Are there enough bucks in "the system" to reckon with FB's wildest imagination? (And it's pretty wild)

My short answer is; I have NO idea!

I'm now willing to challenge (as Muggy has w/FL alleged population growth) that the "sixty percent home equity" is bunk also. To say that "on average" or "the average American has 60% home equity" is (in my mind anyway) misleading at best. I for one would love to know just how it is that they arrive at that figure? Maybe that's a "dumb question" too. With unabated MEW and Zip Down programs it may be comforting to lean on this number (however skewed) but I fear the truth may be more alarming than any of us might suspect. If we were to take OH, IN, IL, WI, MN, IA, and MI out of the formula would it hardly make a dent, or push us off a cliff? I don't know. Surfer X once asked, "Maybe one of you finance types can answer why it is if we basically have a negative savings rate where exactly are the banks getting the money to lend out?"

I sure don't want to get on a soapbox first thing Monday morning but how does a fully paid off family farm in Indiana help some negative equity/upside down like you wouldn't believe FB in Sacramento?

SFWoman,

I don't know. Perhaps you've got more insight than the OECD. As to trade deficits, they don't exactly work that way; they are very highly dependent upon FX and capital flow balances.

Also, if nothing is made here anymore, then why is over 80% of US GDP internally generated?

There are great anti-walmart arguments to be made. Unfortunately, they do not lie with manufacturing. The simple reason being that nearly every US job "lost" over the past half-century has been lost to automation, not to foreign low-cost labor competition. If you want to argue against automation then I'll have to direct you to read a Vonnegut book or two.

Robert C,

Thank you and good morning!

Well, it looks like another Fed rate pause is likely in the books for the next meeting:

http://biz.yahoo.com/ap/060911/economic_outlook.html?.v=3

“the average American has 60% home equity” is (in my mind anyway) misleading at best. I for one would love to know just how it is that they arrive at that figure?

This data is available from multiple, independent sources, including HSBC Research, Citi, FMC, the Fed, HUD, and the Dept of Economic Development.

They all come in around 60%. A disproportionate amount is held by older Americans with very long-term holding periods (25+ years). Since many of these people own 100% of their equity, a drop in real values won't change their ownership level.

I also find it a bit curious that any tiny, meager, dusty, glimmer of anything other than armageddon gloom gets many people around here upset. Sometimes I think many in this community won't be happy until the world is burning. Hyperinflation. Depression. US Peso. Bury gold in your yard. Learn to grow your own beets. Chinese own everything. No US manufacturing left. All your jobs are belong to India.

C'mon. It's just a big, nasty, overdue, unpleasant correction in housing prices, and probably a good chunk of consumer debt. It's not the end of the world; and it's been a lot worse than this before.

(I'll save the follow-ups some time. "All consumption is conspicuous and evil, MBS' will collapse, the world will call US debt, immigrants will storm the borders, cats and dogs will start sleeping together, Matt Groening will marry Ann Coulter...")

SJ/Santa Clara county inventory back up to a new high after Labor Day (as of 9/10):

http://bubbletracking.blogspot.com/2006/09/tracking-san-josesanta-clara-county.html

George,

It is better that the Fed has diversity of opinion and governors who feel comfortable voicing those opinions than a bunch of group thinkers. There are also governors who think that Housing has caused rampant inflation and that rates need to go much higher. It is only from such diversity that any hope of reasonability sprouts. Contrast that to the administration that marched us into an ill-advised bout of nation building and foreign civil war babysitting.

Randy,

Seems to me that looking at "average homeowner equity" gives you a very skewed picture, given the "fat tail" problem.

According to this article from the peak of the bubble (August, '05), the average homeowner (at that time) had 56% equity.

http://money.cnn.com/2005/08/04/real_estate/buying_selling/home_equity_falling/index.htm

According to this source, 1/3 of single-unit owner occupied housing is owned outright (as of 2001--but assume no major change in this number):

http://www.census.gov/prod/2005pubs/censr-27.pdf

So if we have a representative sample group of 100 homes, each worth $200K, then the total value of the homes is $20,000,000. The total debt is $8,800,000 (44%) and the equity position is $9,200,000 (56%).

But wait--33.3 of the homes in the sample group are owned outright. So of the $9.2M in total equity, $6.66M is attributable to the homes which are owned outright. That leaves $2.54M in equity to allocate among the remaining 66.7 homeowners. So the average equity position among *these* homeowners is only $38,080, or about 19%.

Accordingly, by my calculations, if the US housing market were to drop by 20%, then the "average" homeowner, excluding homeowners with 100% equity, would be (slightly) underwater. And of course many would be deep underwater. I suspect that a 20% drop in a state like California would be even more devastating.

Can someone please unlock my post? Thanks

Glen,

Excellent detective work --thanks! That average "60% equity" figure sounded unrealistically high to me as well.

"What is the US manufacturing and why do we have such an enormous trade deficeit? I have a very difficult time finding American products to buy. Also, I don’t think we should count the Mariannas Islands as American products, despite the ‘Made in the USA labels.'"

SFWoman, I know your question wasn't addressed to me, but perhaps the answer to your conundrum is that the U.S. manufactures many items that consumers don't come into contact with. And due to human nature, we don't give appropriate weight to that which we don't encounter on a daily basis.

Clothes, toys, and widgets...yes those are overwhelmingly imported, but in the mind of the consumer these items are highly over-weighted relative to their actual value.

In contrast, the U.S. does make lots and lots of: large scale manufacturing equipment (e.g. the stuff inside Intel's plants), airplanes, automobiles, medical devices, large-scale construction equipment, farm equipment, telecommunications devices, "energy extraction" equipment, and on and on. All very high-value stuff. But on an average day, unless you are in one of those fields, you won't notice that the items are American made.

I think another factor is that if you name almost any type of manufacturing, the U.S. does do SOME of it, and maybe a lot of it. I believe we are incredibly diversified in this respect. In contrast, if you pick almost any other country, I think you will find that in some field or another they are completely unrepresented.

Robert,

Amen. Majority of people are stupid and shortsighted.

Glen, RC

I agree completely. Glen's analysis is completely in line with my view. In short, a largely disproportionate amount of "pain" is aimed at the portion (we'll say between 40% and 66%) of financed owner-occupied home owners.

Even amongst those, there is a distribution. Not all of them will go negative on equity. It would be outright devastating to say that even 1/3 of them did. That doomsday scenario sinks about 1/5 of housing. Looking at the (admittedly unimpressive) data I have in reach here on the Great Depression puts it slightly ahead of total foreclosures during the Great Depression.

What I absolutely agree with is the notion that as one slides down the curve towards more mortgage leverage, the amount of consumer debt also increases. The people in this part of the curve are in double jeopardy, while those outside of it are at much less risk even if their homes drop below mortgage value.

What started all this was the suggestion that "China owns a majority of our housing". That is bunk, to be polite.

HARM,

Excellent detective work –thanks! That average “60% equity” figure sounded unrealistically high to me as well.

And 100% of the residents of my household are male if I exclude females.

Glen, good analysis but it isn’t that bad. The 1/3rd of homes owned outright are not going to be the median homes but the median homes of years long past.

RC,

If I understand your comment, you are saying that homeowners with 100% equity are more likely to be the owners of depreciated, dilapidated 100 year old farmhouses and the like, which are worth less than the current crop of median priced homes. I am not convinced that acquisition date really bears much on home value.

I suspect that there are a few characteristics of homeowners with 100% equity: (1) they are wealthier than average, so they have probably maintained their homes in better than average condition; (2) many of them probably inherited older homes which are more likely than average to be centrally located, architecturally significant and/or well-preserved; and (3) some of them are extremely wealthy people who do not want to bother with mortgages, and who buy homes outright which are much more valuable than the median home. If anything, the median 100%-owned home is probably more valuable than the median mortgaged home, if I had to guess.

Glen,

That's really bothers me too. I don't think we should assume a normal distribution for owner's equity and we know that a marketwide price decline will affect people very differently. For people with 50-100% ownership of their house and no intention to move, price decline has no effect. For people with 0-20% ownership of their houses or people who live in unsuitable houses (eg condo dwellers aspiring to SFH, BA people retiring to Bend, OR) will find themselves in a world of pain. And the flippers are dead meat.

We don't need more than 2-5% annual foreclosure rate to cause serious problems to the banking and mortgage system. A couple years of this to squeeze out one end of the fat tail, and suddenly everybody (except maybe retirees with paid off houses and well positioned retirement fund) is in a world of pain.

And, the "fat tail" problem strongly supports the conclusion of ~60% equity value. As Glen just pointed out, there are multiple reasons to believe that value is skewed towards percentage equity ownership.

Another factor not considered is that the longer the holding-period, the greater the amount of land likely to be included in the property. As land per unit has decreased over the past decades, older properties, even if not updated, tend to increase in value disproportionately to the house's physical value.

Glen,

Your suspicions would sync in with the long established suspicion that a depression would make the rich comparatively richer and further eviserate the middle class.